Basic Difference
Raster: Images are made of pixels.
Vector: Uses mathematical formula to display images.
The image files can be stored in two different formats―bitmap (raster) or vector. While the bitmap images are based on pixels, the vector ones are based on mathematical formula. Though in the normal resolution, one may not be able to make out this difference, in the higher (zoom or magnification) resolutions , these differences are evident. This Buzzle write-up provides an in-depth comparison of raster and vector graphics.
A Closer Look
Before we begin the comparison, let us take a look at the raster and vector artwork, to get a basic idea regarding the two.
Raster vector image
In raster graphics, the pixels are clearly visible upon magnification.
Vector raster data structure
Vector graphics uses formulas to create lines and curves, while raster graphics uses pixels to do t
Raster vs. Vector
Editing is easyEditing needs advanced knowledge
Allows use of various colorsBlending of colors not smooth
Scaling degrades image qualityCan be scaled without losing quality
Conversion to vector difficultEasy conversion to raster
Supports .psd, .jpeg, ,bmp, .gif, .png, .tiffSupports .eps, .ai, .cdr, .ps
PaintShop and PhotoshopIllustrator, CorelDRAW, FreeHand
Raster Graphics
The bitmap or raster file format uses pixels to represent an image. The pixels are smallest components in the image that are assigned a specific color. Each image is made up of many such pixels that are arranged in clusters within a one-inch area. The number of pixels in each inch are known as ppi (pixels per inch). Thus, any image on a 50 dpi monitor will have 50 pixels per inch.

These images when magnified, are distorted or rather pixelated. This is because of the simple fact that the raster graphics have fixed resolution and cannot be resized. Thus, such file format is best-suited for non-line art graphics, like paintings, or photographs. However, if you need to magnify any image, you can create it at a higher dpi. Higher the dpi, more will be the pixels per inch, and better will be the image quality. This file format is used for paintings, postcards, photographs, stationary printing, catalogs, flyers, etc.

Pros: Low size, and easily editable images.

Cons: Difficult to create high-quality images.
Vector Graphics
The vector files use specific mathematical formulas to define areas to produce shapes, lines, curves, etc. These formulas have specific data about the start and end points, the path, curvature, and the colors to be filled in these paths. This format doesn't use pixels, hence the problem of pixelation at higher resolutions is solved.

The vector images are flexible and more versatile than raster images. These can be easily scaled to any size, without affecting the image quality. The jagged edges of a bitmap do not appear in vector images, because in the latter, the images are redrawn using mathematical formula. Due to elimination of pixels (and their reading), the file size of vector images is less than that of raster images. This file format is used for creating drawings, illustrations, cartoons, logos, letterheads, etc.

Pros: Clear, sharp, and easy scalable images.

Cons: Doesn't support most popular formats - .jpg and .gif.
Raster or Vector?
If you want to design anything from scratch and use few colors, it is always better to go in for vector graphics. When you need to edit an image or add a few colors, you can try the raster graphics.